Question

LipTea Incorporated purchases raw materials and has processing plants around the world. The firm has an...

LipTea Incorporated purchases raw materials and has processing plants around the world.
The firm has an average pre-tax cost of debt of 8%, an average tax rate of 40%, and an international equity beta of 1.2. The risk-free rate of return is anticipated to be 4% and the return to the international market portfolio to be 12%. If the firm finances 40% with debt and 60% with equity, what is the after-tax WACC?

10.08%

12.96%

11.36%

10.50%

Homework Answers

Answer #1


Correct option is > 10.08%

Cost of debt After tax= Pretax cost of debt x (1-Tax rate)

Cost of debt After tax= 8% x (1-40%)

Cost of debt After tax = 4.80%

.

Cost of equity = Risk free rate + Beta x (Return on Market – Risk free rate)

Cost of equity = 4% + 1.2 x (12% - 4%)

Cost of equity = 13.60%

.

WACC after tax = Cost of equity x Weight of equity + After tax Cost of debt x Weight of debt

WACC after tax= 13.60% x 60% + 4.80% x 40%

WACC after tax = 10.08%

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